Report: Limiting Federal Spending as a Proportion of Total Gross Domestic Product

Executive Summary

Concern over the growing deficit has resulted in the introduction of several legislative proposals in Congress to limit the growth in federal spending. The “Commitment to American Prosperity Act” (CAP) is one of several bills that would do so by setting a specific target or cap beyond which spending would not be allowed to grow. The CAP Act would limit federal spending so that by 2021, total federal spending would be reduced from a projected 24 percent of gross domestic product (GDP) under current law to about 20.8 percent of the GDP under the CAP Act.

The Act includes a “sequestration” procedure that would automatically cut spending across all federal programs in any year where spending is projected to exceed the spending cap. The process is designed to allocate the greatest cuts to programs experiencing the greatest growth, which would concentrate the cuts among major mandatory programs such as Social Security, Medicare and Medicaid. Because the spending cap is set based on spending, changes in taxes could not be used to reduce the level of cuts required.

The purpose of this case study is to illustrate the impact that these spending reductions would have on people who depend upon federal programs for income and healthcare. Because health care is such a large portion of federal spending, we also present estimates of the impact that these cuts would have on health care provider revenues and the resulting effects on access to care for Medicare and Medicaid beneficiaries. The sequestration is generally implemented through a percentage reduction in payments to beneficiaries and health care providers. A number of proposals now before Congress would also use a spending cap.

Our key findings include:

• Based on data from the CBO, we estimate that the CAP Act would reduce federal spending by $4.2 trillion between 2013 and 2021;
• Programs would be cut in proportion to their rate of growth in costs in the most recent year. Social Security, Medicare and Medicaid would see the largest cuts because the aging of the population, poor economy and coverage expansions contribute to high growth in these programs;
•  Spending under mandatory programs would be reduced by 14.3 percent over the 2013 through 2021 period. Cuts for major programs over his period would be:
  • $1.3 trillion in Social Security;
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  • $575 billion in federal Medicaid payments to states.
• By 2019, Social Security benefit payments would be reduced by 19 percent;
• The reductions in spending for Social Security and other cash assistance programs would increase the number of people living below the Federal poverty Level (FPL) by:
  • 2.3 million people by 2014;
  • 3.8 million people by 2021; and
  • About 350,000 children would fall below the FPL over the period.
• The number of people age 65 and older living below the FPL would increase by:
  • 1.1 million seniors in 2014, an increase of 29 percent; and
  • 2.1 million seniors by 2021, an increase of 44 percent.
• The number of uninsured would increase by 5.1 million people due to reductions in the amount of the premium tax credit created under the Affordable Care Act (ACA) and Premium increases due to increased cost shifting;
• Reductions in government spending for healthcare would reduce employment in the healthcare sector by up to 1.3 million jobs by 2021, primarily in support positions;
• Payments to all health providers from Medicare would be reduced by an average of 14.3 percent over the 2013 through 2021 period;
• The cuts in federal Medicaid payments to states would likely be passed-on to providers in the form of reduced payments under the Medicaid program, averaging 8.1 percent over the 2013 through 2021 period;
• These cuts in payment under government healthcare programs would reduce total provider revenues by an average of 5.3 percent over the 2013 through 2021 time period, depending upon then provider’s payer mix. Total revenue reductions would average:
  • 6.2 percent for hospitals;
  • 3.7 percent for physicians;
  • 6.5 percent for nursing homes; and
  • 5.5 percent for home health providers.
• The cuts in physician reimbursement under the CAP Act would reduce patient access for Medicaid and Medicare beneficiaries, resulting in a reduction the number services supplied by physicians by up to 11 percent under Medicare and up to 4 percent under Medicaid;
• If implemented together with the scheduled physicians cuts of 29.5 percent in 2012 under the Medicare sustainable growth rate (SGR) formula, we estimate that:
  • Medicare payment levels would be at or below Medicaid payment levels in most states, which are already so low that many physicians do not participate in Medicaid; and
  • Physician supply of services for Medicare beneficiaries would fall by up to 24 percent.
• Because Medicaid pays for about half of all long-term care spending nationally, the cuts in Medicaid could have a significant impact on access to long-term care services. By 2021, total long-term care provider revenues would be reduced by:
  • 8.3 percent for nursing home care;
  • 11.6 percent for home health care; and
  • 9.3 percent for home and community-based care programs.
• Annual premiums for private insurance would increase by $721 per worker by 2021 through cost-shifting. Studies show that about 40 percent of payment cuts for public programs are passed back to privately insured people in the form of increased payment rates, in a process called cost-shifting;
• The number of Medicare beneficiaries covered under Medicare Advantage plans would fall by 1.6 million people due to cuts in payments to health plans under the CAP Act (averaging 14.3 percent over the 2013 through 2021 period).

This analysis demonstrates that legislation using across-the-board budget cuts to meet arbitrary federal spending caps can have extremely serious consequences for the most vulnerable members of our society. Changes to programs that aged, disabled and poor people rely upon for sustenance and healthcare must be considered explicitly in the context of their impacts on the beneficiary.